Wednesday, January 24, 2018

If you've been an owner and user of Bitcoin for the last couple of years, then you're well aware of the delays that can happen when trying to buy and sell with it (termed, "sends") as the number of transactions on the blockchain has increased. This is a growing pain of the technology that has at times hampered its value proposition. Naturally, people are working on solutions for it.

One of the ways people have attempted to resolve this is by forking Bitcoin into new blockchains with different rules. The primary example of this is the fork that resulted in Bitcoin Cash, which occurred last August. This created a new blockchain system with one key difference from its parent chain: the size of the blocks that contain the transaction data people generate by using the coin was increased to eight megabytes from two. More transactions being recorded in each block was thought to be the easiest, most obvious way to increase the speed of the blockchain. There are pros and cons to this approach, and its utility and value proposition remain to be seen.

Several years ago a different approach was proposed and began to be developed: instead of tinkering with the existing blockchain, why not layer what amounts to a smaller, faster blockchain on top of it, which only finalizes transactions that take place within it after all "micro transactions" between parties are concluded, effectively only recording on the Bitcoin blockchain the final balance of Bitcoin between two wallets?

"The Lightning Network lets Bitcoin users create "payment channels"
with each other. In these channels, Bitcoin transactions can be sent
without the normal wait times, because the transactions aren't committed
to the Bitcoin blockchain. Instead, the Lightning Network keeps record
of transactions without finalizing them, and later sends a message
describing only the final balances of the channel to the Bitcoin network
as a regular transaction, closing the channel and securing the balance
on the blockchain.

This system cuts down on the number of
messages that the Bitcoin network has to process, since only these
important messages finalizing many smaller ones are included in a
Bitcoin block—chronological entries that, together, make up the
blockchain" -- J. Pearson

The first known real-world transaction using this network reportedly occurred this past Saturday, January the 20th ("real world" here meaning not just a test, but an actual consumer initiating payment for something). All indications are that it was a success. The amount of Bitcoin involved changed hands almost instantly, with no fees and no errors.

This is huge. This directly answers one of the big criticisms of this technology, that with increasing adoption comes increased transaction costs, and therefore fewer practical uses. This is why several FUDsters out there constantly harp on Bitcoin's "failure to work as money." If all you wanted to do with it is buy a cup of coffee, then yes, it becomes the wrong tool for that particular job. But it would be (is) foolish to assume that the people developing this technology would come this far, only to stop and let it grind to a halt under its own weight; the Lightning Network is an answer to that challenge.

As the Wired article I've linked to here states, this isn't a done deal. Just like Bitcoin itself, Lightning requires adoption to become more of a force in this space. However, given the potential benefits of Lightning, participation is growing.

Bitcoin as a stable store of value that cannot be manipulated by crooked banks or inflated away by corrupt governments has always been the dream behind it. It was envisioned as a secure network that requires no trust on the part of any party, simply operating by set, clearly defined rules across any border. Its potential value as that to people all over the globe is tremendous, and that is the big reason it has gotten to the valuation is has now. Yes, it has fallen far from its most recent peak, but even after all that it's worth thousands per coin. All that, with at this time barely one quarter of one percent of all of humanity using it. Despite the growing pains and the howls of all of Bitcoin's critics, its fundamental worth as a solution to problems of access, security, and resistance to corruption is still the case. With more barriers to its everyday usefulness removed, just imagine where it could go next...